At Cobalt, we work with clients that believe that intelligent data analysis powers effective decision-making. Moreover, these limited partners (LPs) often value the insights they derive from regular performance measurement and benchmarking. Private markets investments have always presented unique challenges when measuring performance relative to other asset classes. Investors in private markets funds make an upfront commitment to a blind pool of capital. Then, managers call commitment over time (typically over the first 3 – 5 years of a fund’s life) as the fund manager sources investments. Likewise, managers distribute proceeds after selling investments. This dynamic creates an irregular stream of cash flows, necessitating the use of the internal rate of return (IRR) as the primary performance measure.

Conversely, public markets returns are commonly quoted as a time-weighted return (TWR). TWR is not comparable to an IRR. This creates difficulties with performance comparisons between private markets and public markets. A TWR does not account for the timing and sizing of cash flows, as an IRR does, making TWR ill-suited as a performance metric for private markets funds. For investment teams compiling board reports or evaluating asset allocations, this can be a major headache.